Shares of private sector lender Axis Bank have surged over 20 per cent so far in the calendar year 2019. The market capitalisation of the bank has increased by over Rs 33,000 crore to Rs 1,94,281 crore during the same period (as of March 20, 2019), data fetched from ACE Equity shows. Despite this outperformance, most brokerages are bullish on the bank's profitability and see more upside ahead.
The bank recently hosted an analyst day where the management reiterated its objective of delivering an 18 per cent return on equity (RoE). ROE is a measure of a company’s annual return i.e. net income divided by the value of its total shareholders’ equity. It is expressed as a percentage.
Here's a list of top five factors why most brokerages believe more steam is left in the stock's rally -
Structural changes: Axis Bank plans to make Product, Underwriting and Operations a separate function in both Wholesale and Retail business from 1st April, 2019. This will prevent any inherent conflict of interest and help maintain better asset quality trend across cycles, note analysts at Motilal Oswal Financial Services (MOFSL). The bank has recently hired a new compliance officer to bridge differences with the regulator.
The brokerage has maintained 'buy' rating on the stock with the Target Price of Rs 875.
Three pillars to drive ROE: Analysts at Edelweiss Securities believe the bank will build up its RoE to 18 per cent-plus on account of risk normalisation (reduction of credit cost below long-term average with no negative surprise), business mix optimisation, and improvement in operating efficiency (reduction in cost/assets to 2 per cent).
Asset quality seen improving: Axis’s asset quality has notably deteriorated over the past three years, which has dented its return ratios. The bank's net NPAs (funded) to net advances stood at 3.40 per cent, 2.11 per cent and 0.74 per cent at the end of March 2018, March 2017 and March 2016, respectively. Return on equity (ROE), which stood at 16.81 per cent in March 2016 declined sharply to 6.7 per cent at the end of March 2017 and 0.46 per cent in March 2018, ACE Equity data shows.
However, it is likely to improve going ahead owing to a paradigm shift in credit risk practices, decreasing proportion of the BB and below rated book, and better retail asset quality (versus peers), says Darpin Shah, an analyst at HDFC Securities. "We have factored in slippages of 3.6% over FY19-21E," Shah adds.
Focus on growth and profitability: The lender is focusing on increasing the scale of certain businesses substantially to reach in top tier categories which will help command profitability. Certain verticals like debt capital market (DCM), equity capital market (ECM), digital and cards/payments already on a leadership position and leveraging relationships has been a key area of mindshare, say analysts at Prabhudas Lilladher.
Going ahead, the bank would continue to focus on growing retail assets especially to high yielding segments (moved from 29 per cent to 37 per cent of retail in last 5 years), move share towards mid-corporate/commercial banking and do higher working capital to corporates.
Changes in credit culture: Addition of fresh talent is supported by a change in credit/risk practices. Credit/ risk heads now report to the MD (vs. business heads earlier). Further, they are no longer bound by net interest income (NII) and fee targets. HDFC Securities believes this will materially improve underwriting quality. The brokerage has maintained 'Buy' rating on the stock with a revised sum-of-the-parts valuation (SOTP) target price of Rs 894.